A lot of people spend hours on end researching various different companies in order to find a few hidden gems. However it’s worth bearing in mind that if you’re trading mid/large-cap stocks, the price movements of these shares will often be determined by the movements of the overall stock market.
For instance if you mainly trade large-cap stocks in the FTSE 100, it’s not enough to just look at individual companies. You also need to think about how the FTSE 100 index is going to fare over the coming months. You could easily pick a great company that’s underpriced, growing it’s overall profits each year and paying a healthy dividend, but if the FTSE 100 falls substantially after your share purchase, then the share price is almost certain to fall as well.
This is why I personally don’t feel that this is a great time to be buying shares in large-cap stocks. At the time of writing (January 2010) the FTSE 100, and indeed the major stock markets all around the world, have posted gains in the region of 30% as the global economy starts to come out of recession. This upward trend may well continue but I don’t see a great deal of upside in 2010. In fact I think we will probably finish the year roughly where we are now.
So in my view you basically have two choices. You can either wait for a retracement and then start seeking out good quality companies that may then be oversold, or you could focus your attention on small-cap stocks whose share price movements are driven by individual company news. My own strategy is to apply both of these strategies because I always like to have a mixture of small and large-cap stocks.
Anyway the point I want to make is that you should always keep on eye of the wider stock market and make your trading decisions based on these markets. For instance if you’re a UK trader like myself, it’s generally a good idea to use technical analysis on the FTSE 100 to see when it is oversold. Then you can start looking for decent companies knowing that the price is likely to rise as and when the FTSE 100 recovers. Plus the rise is likely to be greater if you pick those companies that offer the best value.
Stock market investing is all about timing. The key to success is to buy low and sell high, and the best time to do that is when the overall stock market, whether it’s the FTSE 100, Dow Jones, DAX or the Hang Seng, for instance, is temporarily oversold.
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